Fortescue could sell stake to Baosteel - report

CHINA could be coming to Fortescue Metals Group's rescue, with reports suggesting the iron ore miner could sell a stake in the company to its largest customer.

Unconfirmed reports have emerged today that Fortescue could already be in negotiations with Chinese steelmaker Baosteel over a possible sale of up to 15 per cent of the company.

Without citing sources, the Australian Financial Review is reporting that Fortescue could welcome Baosteel as a strategic investor through the placement of shares priced at $4 each.

That would be at a 34 per cent premium to Fortescue’s last traded price of $2.99 before it called a trading halt earlier today.

There have also been suggestions that Fortescue is reportedly looking to sell its Pilbara trains and trucks to either Kerry Stokes’ Westrac business or to rail operation QR National is a move to bolster its cash reserves.

Yesterday the miner’s shares slumped as much as 15 per cent, wiping off some $1.5 billion off its market value, as speculation heightened the company had asked its lenders for breathing space over its loans, which peak at $10 billion, over the next 12 months.

Fortescue has since confirmed it is in the process of talking to its lenders about potential waivers to its banking covenants, which it said are “put under pressure by extended volatility in the iron ore market”.

The miner did stress that is was in compliance with its banking covenants, with the next review date at the end of the year.

The spot iron ore price has slumped over recent months, with the current price at $US96.10 a tonne, down 2 per cent on the previous day.

Last week Fortescue surprised the market by announcing around 1000 jobs would be cut from its Pilbara iron ore operations, and that its expansion plans would be curbed to 115 million tonnes per annum (mtpa) as opposed to earlier plans of 155mtpa.

Bell Potter Securities institutional dealer Giuliano Sala Tenna said it had long been alluded to that an iron ore price under $US110 a tonne for an extended period of time would create some problems for Fortescue’s balance sheet.

“Fortescue’s situation at the moment is very precarious,” said Mr Sala Tenna, adding the miner had suggested that at an iron ore price of $US90 a tonne, its operations may not be profitable.

“[Fortescue’s] options are multi-pronged.

“They’ve clearly indicated they’ve had to cut costs so they’ve cut costs and slowed down their expansion plans.

“We’ve seen breaking news that there may be talks going on with Baosteel, potentially looking at striking a deal with Fortescue, so Fortescue won’t have to go to equity markets.

“They have very good relationships in China, and I think those conversations would potentially be happening.

“Is it a high probability, who’s to know? The market is in a state of flux.”

Mr Sala Tenna said raising equity would be the last option for Fortescue, with the miner resisting that option over the past few years in favour of debt.

He said the equity raising would be highly dilutionary given the company’s weaker share price.

Fortescue chairman Andrew Forrest holds a 32 per cent stake in the company.